Fed snoozed as markets tumbled

After a five-year waiting period, the Federal Reserve System has released transcripts that have set tongues wagging in economic wonkdom. The records show just how asleep at the switch the “smartest men in the room” were, proving that Fed Chairman Ben Bernanke and other members were dismissive of the escalating subprime mortgage crisis, and clueless as to its consequences until it was far too late.

When the Fed convened in August 2007, the subprime mortgage market was already unraveling, with Bear Stearns and several other large lenders scrambling to cover huge losses. Yet the policymakers never mentioned the housing decline in their report and decided not to cut interest rates. This, rather famously, caused CNBC investment commentator Jim Cramer to erupt in his on-camera “They know nothing!” rant.

We certainly knew something was up locally. Home prices had experienced a precipitous decline since their peak in early 2006. By the summer of 2007, the Palm Beach County real estate market — previously one of the hottest and most speculative in the nation — was a disaster.

As shown in my June 24, 2007, Palm Beach Daily News editorial cartoon, things weren’t nearly so bad on Palm Beach — yet. Wealthy Palm Beach property owners were not typically in distress situations and it was business as usual.

That would change shortly when the financial dominos began falling. The market tanked when subprime, mortgage, bank credit, hedge fund, and foreign bank debt obligations imploded. Then, even the investor class took a haircut.

But worse, it wasn’t long before Madoff Investment Securities and other investment ponzi schemes were caught with their pants down, and Palm Beach was hurt badly.

Members of the Fed have admitted, in hindsight, that they underestimated the interconnectedness of the housing decline and the financial markets, some saying they might have averted disaster if they had acted earlier. So what else is new?

The current recession is not only the result of the subprime mortgage and credit default swap schemes getting out of hand, but appears to be an accumulation of a succession of economic failures. In my recently released book, Billionaires and Butterfly Ballots, A 20-Year Palm Beach ‘Cartoonspective,’ I devote a chapter of cartoons, entitled “Another fine(ancial) mess,” documenting one financial debacle after another since the turn of the millennium. Greed, disingenuous politics and regulatory ambivalence were at the root of them all.

No doubt, we can learn about our failings by perusing transcripts and editorial cartoons. But more importantly, perhaps if Americans become more engaged and educated with our country’s current economics, we could knowledgably hold politicians and the agencies they oversee accountable — before they screw it up again.

David Willson has been the Palm Beach Daily News editorial cartoonist for 20 years. His new book, Billionaires and Butterfly Ballots, A 20-Year Palm Beach ‘Cartoonspective,’ is available at palmbeachcartoons.com